U.K. Gas Extends Rout Amid LNG Surplus, Oil Slide to 6-Year Low

Natural gas in the U.K., Europe’s biggest market for the fuel, fell to new lows as oil prices tumbled and imports of liquefied natural gas soared.

U.K. prices for gas this winter fell to a record, while the contract for delivery next month extended its longest price decline since December on the ICE Futures Europe exchange. LNG terminals are feeding 62 million cubic meters (2.2 billion cubic feet) of gas a day into the U.K.’s energy network, double the 12-month average, grid data show.

Oil’s slide to the lowest in more than six years is deflating gas prices because almost half of Europe’s gas is sold under long-term contracts linked to crude. Even more price pressure is coming from increasing LNG imports to the U.K. as its liquid trading hub and ample terminal capacity lures cargoes that can’t find a home in Asia, where demand has slumped.

“Unless we see some geopolitical event lead to supply disruption, then support for the wholesale gas market is likely to be limited” in the longer-term, Nick Campbell, an energy risk manager at Kirkham, England-based Inspired Energy Solutions, said by e-mail Thursday. LNG flows and falling oil “point to healthy supply meeting somewhat lackluster demand.”

Winter gas in the U.K. fell 0.5 percent, a seventh day of declines, to 43.4 pence a therm ($6.79 per million British thermal units) by 11:24 a.m. in London on ICE. That’s the lowest level since the contract started trading in July 2010. Gas for next-month delivery fell 0.8 percent to 38.71 pence a therm, the cheapest since July 2014.

Brent Slump

Brent, the European benchmark crude, has plunged 54 percent in the past year on ICE. That will help lower gas prices in European utilities’ long-term supply contracts, “of which they have still yet to take up significant volume,” Campbell said.

Russia, which meets a third of European gas demand and links most of its gas prices to crude, will probably keep its flows at record-high levels, Citigroup Inc. analysts including Chris Main said in a report e-mailed Wednesday. The oil-linked prices are set for further declines into next winter, they said.

Limited capacity at Rough, the U.K.’s biggest storage site, and production cuts at the Dutch Groningen field may provide some short-term price volatility in a cold snap, Campbell said.

Global LNG capacity is set to exceed demand by 25 percent by 2018, with excess fuel heading to the liquid trading hubs in Europe, UBS AG said in an Aug. 12 note.

U.K. gas storage sites were 77 percent full as of Wednesday, still below seasonal levels of at least 80 percent in the previous six years, data from lobby group Gas Infrastructure Europe show.

Before it's here, it's on the Bloomberg Terminal.